Canadian Equity

The Canadian stock market continued to be resilient in the first quarter as a global economic recovery drove the S&P/TSX Composite to a gain of +3.1%. This is the fourth consecutive quarter of positive returns. Nine of the ten equity sectors finished positive. The strongest performing sectors were financials, health care and consumer discretionary while the sole negative result came from energy. Small cap stocks continued to lead large caps with the S&P/TSX Small Cap Index up 4.9% in the fourth quarter.

Global Equity

While concerns remain about the sustainability of the economic recovery, the S&P 500 Index added another 2.3% in CAD in the first quarter, continuing a rally that has been in place since last summer. Exchange rates had a large negative impact on foreign returns as the Canadian Dollar appreciated further against major currencies which detracts directly from Canadian returns. International (EAFE) equity markets ended the quarter down 2.3% in CAD with the Greece debt crisis hanging over markets. Regionally, Europe (-4.9% CAD) underperformed the Pacific +2.8%). The top performing countries were Finland (+8.3%) and Denmark (+6.2%), while Greece (-16.0%) and Spain (-18.0%) had the largest declines. Emerging markets were down 0.9% in CAD.

Fixed Income

Fixed income returns were positive during the first quarter as the DEX Universe Index was up 1.3%. Gains were led by corporate bonds which increased 2.2% as credit spreads narrowed. Central banks in Canada and the U.S. maintained their near zero interest rate policies; however, with strengthening economic data coming in, they began pulling back on some of the temporary liquidity measures that were introduced during the credit crisis. These moves caused the yield curve to shift up in the short-end and flatten on the long-end as the market anticipates interest rate hikes to begin in the next few quarters.

Continuing the trend of the second half of 2010, the Canadian equity market posted strong first quarter results with the S&P/TSX Composite Index up 5.6% over the period. Gains were led by the health care sector (which represents only 1% of the overall Index) and the energy sector as crude oil prices increased in the face of rising political tension within the Middle-East and Northern Africa. Materials was a poor performing sector despite the rise in commodity prices globally. Small cap stocks lagged their large cap counter parts.

Global equity markets posted positive results during the quarter but trailed the Canadian equity market. U.S. equities were up 3.5% in Canadian Dollars ($C). Gains were led by the energy sector as fuel prices continued to increase. The depreciation of the U.S. dollar versus the Canadian dollar negatively impacted foreign holdings.

The European region returned 4.3% ($C) in spite of concerns of potential economic bail-outs for peripheral European countries. Expectedly, the Japanese equity market declined 6.9% as the nation tries to rebuild following the tragic natural disasters and nuclear crises, which interrupted manufacturing supply chains globally. Emerging markets trailed developed markets due to worries regarding rising inflation.

Fixed income returns were negative once again as the DEX Universe Bond Index declined 0.3%. Corporate issues provided positive results while government bonds were in negative territory. Short-term bonds significantly outpaced longer term maturities. The Bank of Canada maintained the overnight rate at 1% while the U.S. Federal Reserve maintained their target of 0 – 0.25%.